PetIQ, Inc.

fourth quarter and full year 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone keypad. If at any time during the conference you need to reach an operator, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on PetIQ's fourth quarter and full year 2020 earnings conference call. On today's call are Ford Christensen, Chairman and Chief Executive Officer, Susan Schulzis, President, and John Newland, Chief Financial Officer. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today's call, management will refer to certain non-GAAP financial measures, including adjusted gross profit, adjusted SG&A, adjusted net income, and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's release for a reconciliation of non-GAAP financial measures and the most comparable measures prepared in accordance with GAAP. In addition, PetIQ has posted a supplemental presentation on its website for reference. I'd now like to turn the call over to Cord Christensen.

Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and full year 2020 financial results. Today, I will begin with an overview of our strategic business and financial highlights, then Susan will provide greater detail on our services segment, and John will discuss and review our financial results. Finally, Susan, John, and I will be available to answer your questions. In 2020, the diversification of our business model and the complementary nature of how we connect with pet parents across our products and services segment has never been more evident. We generated record fourth quarter and full year net sales of $164.2 million and $780.1 million, respectively, and full year consolidated adjusted gross margin improved 130 basis points to 19.6%, and adjusted EBITDA of $67.8 million increased nearly 12%. This is impressive considering we operated much of the year with our wellness centers and community clinics temporarily closed due to COVID-19. And while we started reopening a small number of our locations in May, we still had certain regions, for example, in California where our clinics and wellness centers were not reopened until early in the fourth quarter based on local and state regulations and restrictions. We continue to operate across our entire organization with our number one priority being the safety and health of our employees. Our team has done a tremendous job to execute on our strategic objectives. Their agility and collaboration have helped us serve our retail and e-commerce partners. Together, we've experienced changing consumer purchasing habits that have meant we needed to be flexible to ensure we are serving pet parents and their pets where and when they needed to fulfill their pet health and wellness needs. The financial strength that our product segment provides to our broader business is an important component of the resilient nature of FedIQ. The product segment fueled our financial results in the fourth quarter and for the year. This helped to reduce some of the financial impact from our services segment. As we discussed on previous calls this year, in the middle of the year during Q2 and Q3 in particular, we experienced fluctuations in our business related to COVID-19, resulting in episodic surges in demand for our products business. At times, this made our quarterly year-over-year comparisons less indicative than our year-to-date comparisons when measuring the strength and momentum of our underlying business trends. Importantly, what has not changed are our robust industry tailwinds, including the humanization of pets and continued significant growth in our categories as pet parents are taking better care of their pet's health and wellness needs. These tailwinds are demonstrated by our annual products segment net sales increase of 17.6% year-over-year to $725.7 million, and adjusted EBITDA margin increased 440 basis points from Q4 last year to 17.1%. Our products business outperformed our original expectations for the year despite any COVID-19 related volatility. Taking a closer look at our product segments for the fourth quarter, sales were led by our e-commerce business that was up over 42% versus Q4 last year. Our non-RX e-commerce business was up 39% year over year for Q4. Our manufactured e-commerce business was up 161% including Capstar or up 95% excluding Capstar. Our products team emphasis on winning at both retail and e-commerce is paying off. The product segment distributed and manufactured product sales mix continued to improve beyond the 75%, 25% historical sales mix for the quarter. And we expect to see further improvement in 2021. Q4 marked our first full quarter of cap start with results that continued to outperform our expectations. We have clear line of sight to conservatively achieve our stated greater than $20 million of incremental EBITDA contribution from Capstar in full year 2021. This will also drive additional product segment margin improvement in 2021. Based on our Q4 and full year 2020 results and key programs already planned for 2021, we have tremendous confidence in our future growth trajectory and business momentum. PetIQ participates in several of the largest and fastest-growing categories within the pet industry, such as flea and tick solutions and health and wellness. As these categories have evolved both in size and channel, we are purchasing market data to better reflect our understanding of the categories we compete in. This new e-commerce data comes from a broader Nielsen report and data from a partner of IRI known as 1010Data. For the 52 weeks ended December 26, 2020, these data sets show the flea and tick category growing 11% and now eclipsing a 1.5 billion market in the OTC product segments. PetIQ's flea and tick manufactured brands outpaced this category by growing 13% while picking up 40 basis points of share in 2020. These share gains were driven by the e-commerce channel where our brands grew 63% year-over-year Our performance in these fast-growing set of customers was fueled by the Capstar brand, which was up 73%, along with PetArmor Plus, which grew 41%. PetIQ continues to lead the fastest-growing form within the flea and tick category of oral treatments. In 2020, this segment grew 24%, with PetIQ's portfolio growing 26%, and commanding the largest share of any oral brand in the measured oral category. This segment is expected to maintain strong momentum as we head into and throughout 2021. For the 52 weeks ended December 26, 2020, based on the same data sets, the health and wellness categories grew 42% and now eclipsing an 800 million market in the OTC product segments. CutIQ brands grew nicely at 22%, Yet we trailed the category due to just beginning to build out our portfolio within the e-commerce segment where the category is growing 66%. We view this as a strong incremental opportunity as we move forward. In 2021, we plan to launch an advanced product line to better position us to compete within the e-commerce channel. These types of premium offerings are what have led e-commerce to become dominant across the market within health and wellness. We are excited to begin participating in this segment and to provide our loyal consumers an even better option to meet their needs of their pets. As a result, our ability to grow and work collaboratively with our retail and e-commerce partners, beginning late in Q4, we invested in production and distribution capacity. This investment is continuing into Q1 and supports our confidence in PetIQ's longstanding relationships with our distribution partners, which we expect to continue to grow significantly in 2021 and for many years to come. Shifting to our services organization, our team reopened 100% of our clinics and wellness centers in Q4 in line with our stated objective. We finished 2020 with 126 wellness centers and operations, including 19 Wellness Center openings in Q4. Although our openings continue to demonstrate that we have returned to pet counts and average ticket per pet in line with our numbers pre-COVID-19 and ahead of the prior year period, we are continuing to experience COVID-19 headwinds caused by having to close 12% to 16% of clinics in operation due to employee absenteeism. This is caused by employees calling in with COVID-19 related symptoms and illnesses across our national services network. While we hope this level of absenteeism will lessen as we move forward, we are pleased to report that the clinics that are operating are delivering the individual profit contribution we would expect from those operations. The improvement in our services segment is most evident when taking a look at our results from Q3 to Q4, Services segment net revenue increased 60% from Q3, and on a year over year basis, our net revenue for Q4 was down 1.5% to 19.2 million, but almost back to break even. This is significantly better than the deficits we saw in Q2 and Q3. Our management team estimates that the fourth quarter impact to the services segment for those closures was approximately 5.6 million of lost revenue, and approximately 680,000 of adjusted EBITDA. Total service segment revenue for the quarter would have been approximately 24.8 million and adjusted EBITDA of 1.2 million if the services segment remained open and achieved its budget. We are pleased with the improvement in our services segment results for Q4 and to start 2021. We are expanding our telehealth platform and the resources needed to fuel our growth in 2021 and beyond. Our recruiting of new veterinarians and vet tech is progressing in line with our growth objectives. We believe PetIQ's mission of delivering smarter options for pet parents to help enrich their pets' lives through convenience and affordable access to veterinarian products and services has never been stronger. From a balance sheet and cash perspective, we continue to have ample liquidity and financial flexibility with our cash on hand, cash generation, and existing availability under our revolving credit facilities to support our future growth. And although we have suspended formal guidance due to uncertainty from potential COVID-19 related impacts to our business, we do want everyone to understand that as I stated on our Q3 call, we continue to maintain an internal budget of approximately $950 million in net sales and over $100 million in adjusted EBITDA. with the only significant variable to this plan being absenteeism affecting our services segment results. We have great visibility to another year of significant margin expansion and adjusted EBITDA margin expansion, demonstrating accelerating profit leverage at PetIQ. We will continue to monitor this as the year progresses, and as we reach a steadier state with lower or minimal rates of absenteeism, we will then be in better position to provide formal annual guidance. Before I turn the call over to Susan, I would like to welcome Cheryl Laughlin and Kim Lefkoe to PetIQ, both as independent directors on our board of directors. We are thrilled to have both of these talented executives joining our board, and we look forward to their significant contribution to our business. In summary, we believe PetIQ's differentiated position in the animal health industry will continue to fuel our long-term growth Our vertically integrated product manufacturing and distribution platform and national footprint of convenient and accessible veterinarian services, prescriptions, and OTC medications at a value are resonating with pet parents. We are fortunate to be in an industry that continues to experience rising pet adoption, increases in dollars spent for pets, and an emphasis on affordable, convenient pet healthcare. We believe PetIQ remains well positioned to capture a disproportionate amount of the industry growth as we move forward. With that overview, I would like to now turn the call over to Susan.